Catastrophic Health Risk and Retirement Portfolio Choice

Emil Bandoni () and Carolina Fugazza ()
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Emil Bandoni: Central Bank of Ireland and University College Dublin
Carolina Fugazza: University of Turin and CeRP-CCA

No 109, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: A well-documented pattern in US household portfolio data is that the conditional risky share remains broadly stable throughout retirement. We ask whether rare but catastrophic health-expenditure shocks in retirement are sufficient to account for this pattern. We develop a parsimonious life-cycle portfolio-choice model in which rare health disasters, calibrated from Health and Retirement Study (HRS) evidence on severe long-term-care episodes and out-of-pocket medical spending, can absorb a large share of current retirement income and weaken the safe-asset role of pension income. Under this data-driven calibration, the model reproduces the nearly flat risky-share profile observed in the Survey of Consumer Finances and generates a negative health gradient consistent with HRS panel evidence, without bequest motives, housing, annuity choice, endogenous health investment, or recursive preferences.

Keywords: life-cycle portfolio choice; disaster risk; long-term care; health risk; out-of-pocket medical spending (search for similar items in EconPapers)
JEL-codes: D15 E21 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2026-08
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